State Pensions Exceed IRS Limits By Tens Of Thousands

Since 2009, Cap Has Been Set At $195,000 A Year

July 24, 2011|Jon Lender, Government Watch

Everybody's seen the annual top-10 lists of state retiree pensions that climb above $250,000 a year, as well as news accounts of police or prison guards racking up heavy overtime in their pre-retirement years to inflate their pensions.

But if you think you've heard everything about problems with Connecticut's state employees' pension plan, you're mistaken. Here's a new one: Over the past decade or so, the state has apparently paid a small group of elite pension recipients hundreds of thousands of dollars more than the federal Internal Revenue Service allows under its rules for public employee pension plans.

The IRS since 2009 has set $195,000 as the cap for an annual pension under plans such as Connecticut's — but that limit was exceeded last year by five state retirees' pensions that ranged from $198,296 to $263,047. Most were for former UConn professors and administrators.

The overpayments may even go into the million-dollar realm if they're added up for all the retirees over the past decade, but state officials say they won't know how much money is involved until actuaries and tax lawyers investigate the situation during coming months in consultation with the IRS.

The Office of the State Comptroller, which administers the state employees' pension plan, was calculating and paying out pensions under a decades-old formula until the summer of 2010, when it belatedly woke up to its obligations under IRS rules near the end of then-Comptroller Nancy Wyman's 16-year tenure.

The IRS grants significant tax benefits to pension plans such as Connecticut's — such as allowing employees to make their annual contributions toward their pensions without having to pay income tax on them. But in granting such tax benefits to a pension plan, the IRS insists that the plan abide by limits to the size of pension payments.

Since January, newly elected Comptroller Kevin Lembo has been abiding by the IRS pension limits with state employees who've retired this year. But so far he and retirement officials in his office have left intact pensions being paid far above the IRS limit to a few retirees. Lembo wrote in April to the Connecticut State Employees Retirement Commission, asking that it "retain legal counsel" to address the problem.

One is the issue of fairness to new retirees — whose pension amounts may be lower than they would have been because the IRS rules are now being adhered to, even though there's been no reduction in the benefits of people who retired in past years and whose pensions remain over the IRS limit.

At least one recent retiree has seen his pension reduced by the IRS limit to a lower amount than he expected: Prison guard Erik Neuendorf retired in March at age 43 from the Department of Correction after 21 years of service; "hazardous-duty" employees such as police and prison guards can retire after 20 years regardless of age. His lifetime pension under the state's formula would have been $62,040 in his first year, with annual cost-of-living increases. However, with the new imposition of the IRS rules — which reduce the maximum-allowable pension on a sliding scale according to age — his pension was reduced to $56,160.

(Even that reduced pension amount still exceeds Neuendorf's highest base salary of $54,305 in his final year of work, because in each of the three years on which his pension was calculated, he worked heavy overtime that averaged $52,141. Also, one lump-sum holiday payout of $31,257 was included in the calculation.)

Neuendorf said Friday that he is pursuing the issue with his union, which is arguing that correction officers should be categorized with police and firefighters who aren't subject to the same IRS limit. If that fails, he said, "I will seek my own legal representation."

Another potential issue of fairness could arise as officials decide what to do about the few top pension recipients who already have been receiving tens of thousands of dollars more per year than the IRS permits.

Take, for example, Dr. Jack Blechner, the former head of obstetrics at the UConn Health Center who received a pension last year that was nearly $60,000 higher than the IRS's current limit of $195,000.

The IRS moves the pension limit up every year few years to adjust for rises in the cost of living, but the annual pensions of Blechner and a few others — which grow annually with cost-of-living adjustments of at least 2.5 percent — have exceeded those federal limits repeatedly.

For example, the IRS limit in 1995, eight years after Blechner retired, was $170,000, and his pension that year was $219,725. In 2007 the IRS limit was $180,000 and his pension was $233,106.